RE KONG WAH HOLDINGS LTD

HCCW 49/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2000

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HCCW 50/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 50 OF 2000

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DECISION
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1.  The liquidators of Akai Holdings Limited (“Akai”) and Kong Wah Holdings Limited (“Kong Wah”) (collectively “the Companies”) issued three summonses on 16 September 2005, 25 October 2005 and 11 November 2005 under section 221 of the Companies Ordinance, Cap. 32 against seven respondents seeking orders that:

(1) The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), the 1^st respondent herein, do supply documents within its possession, custody or control as set out in Schedule 1 of the summonses in respect of the entities in Schedule 2 (“the Designated Companies”); and

(2) each of the 2^nd to 7^th respondents, who are or were officers of HSBC, be examined on oath concerning the affairs of the Companies.

2.  On 15 September 2005, I made an order, which was amended on 21 September 2005, to preserve the confidentiality of all documents filed in relation to the said summonses.

3.  The summonses were served on each of the respondents except for the 5^th respondent, Karl Ming Wah Kam.  The liquidators’ solicitors have attempted service on him on four occasions at his last known place of residence but without success.

4.  I do not propose to set out the background of the Companies and the events leading to their winding up; the management and control of the Companies, their subsidiaries and associates (collectively “the Akai group”) from late 1999; the circumstances in which the assets of the Akai group were purportedly secured in favour of and prima facie realised for the benefit of The Grande Holdings Limited group of companies (“the Grande group”); and the transactions investigated by the liquidators.  They were given in some detail in the 8^th affidavit of Cosimo Borrelli, who is one of the liquidators.

5.  HSBC was involved in the affairs of the Companies in this way:

(1) it was a principal banker to the Companies throughout the 1990s until their demise in 2000;

(2) it was the key lender to the Companies and is the largest creditor of the Companies;

(3) it was, until its resignation on 23 September 2005, a member of the committee of inspection of each of the Companies;

(4) it was a principal banker to the Grande group;

(5) it was a banker to the former chief executive and chairman of the Companies, James Ting, and his wife Angela Tseng Su Lan, in their personal capacities, as well as other former officers of the Akai group who, as revealed by the liquidators’ investigations, received payments from the funds of Akai which were unusual and which appeared to be outside the ordinary course of business; and

(6) it was the liaison bank for the steering committee formed by a number of the financial creditors of the Companies from January 2000 until the Companies were wound up on 23 August 2000.

6.  The five individual respondents who were represented at the hearing indicated that they have no objection to the making of orders for oral examination against them.  They have set out in the letter of their solicitors to the liquidators’ solicitors dated 5 January 2006 their non-available dates and requested that the dates for the examination be fixed to accommodate their schedules, in view of their professional and personal commitments and that some are residing outside Hong Kong.  They also requested that sufficient notice of the proposed hearing dates be given to them, with a list of the topics that the liquidators intend to cover in the examination.  I consider these to be reasonable requests.

7.  I make an order for oral examination against each of the 2^nd to 7^th respondents.  In respect of the 5^th respondent, who was not represented at the hearing, he would have liberty to apply to set aside the order made in his absence.

8.  As to the order for production, the stance of HSBC is as follows.  HSBC has always recognised that the liquidators have a public function to perform and that it is necessary and desirable to co-operate with the liquidators’ investigations, to the extent it can reasonably do.  At the same time, HSBC has its own duties of care and confidentiality to its own customers with respect to the affairs of its customers.  For that reason, it is not possible for HSBC voluntarily to disclose documents and information relating to its customers unless otherwise required by law.

9.  Furthermore, as the customers of HSBC are not privy to (due to the confidentiality order made on 15 September 2005) and are not represented in these applications, it falls on HSBC to raise any jurisdictional issues and all relevant matters before the court, so that the court can properly carry out its balancing exercise.

10.  HSBC adopts a neutral stance on the production of documents and seeks only to put the liquidators to proof that the full range of documents sought in Schedule 1 is properly within the ambit of section 221(3) of Cap. 32.

11.  Without prejudice to the above stance, HSBC has put forward a revised draft order and revised Schedule 1, in the event that the court is satisfied that the documents sought in Schedule 1 in respect of the Designated Companies do relate to the affairs of the Companies.  This is in the interest of clarity as where the ambit of the order proposed by the liquidators is extremely broad, it is of great importance to HSBC to know precisely what it must do to comply with the order.  HSBC also seeks to agree a protocol with the liquidators to produce documents in stages, to minimise unnecessary disruption.  The liquidators are agreeable to this approach.

12.  Of a total of 485 Designated Companies, HSBC has identified 164 companies that have been customers of HSBC at some point (“the Designated Customers”), the names of which are not disclosed in the evidence it has filed in this application.  The Designated Customers maintained approximately 700 accounts with HSBC.  Mr. Borrelli’s 8^th and 19^th affidavits did not describe in any detail how the list of the Designated Companies in Schedule 2 was arrived at, or how each of these 485 companies (with the exception of a few prominent ones) came to be involved in the affairs of the Companies.  It was contended by HSBC that there is a lack of “forensic detail”, and this has placed it in a difficult position, particularly in relation to the Designated Customers.

13.  Further evidence has since been filed by the liquidators in the 20^th affidavit of Mr. Borrelli on 12 January 2006, to confirm and expand on the matters that Miss Chan has informed the court on instructions of the liquidators at the hearing.  Mr. Harry has also provided further submissions in writing on behalf of HSBC on the evidence filed by the liquidators after the hearing, pursuant to the directions I gave.

14.  Mr. Harry has drawn my attention to the decision of the English Court of Appeal in Re Mid East Trading Ltd. [1998] 1 BCLC 240, in which Chadwick LJ stated at 248h to 249b as follows:

“Section 236(3) of the 1986 Act [equivalent to our section 221] empowers the court to require any person coming within paras (a) to (c) of s 236(2) to produce any books, papers or other records (‘documents’) relating to the company or the other matters mentioned in sub-s (2)(c) – that is to say relating to the promotion, formation, business, dealings, affairs or property of the company. For convenience we shall use the expression ‘relating to the company’ to include the wider concept.

Persons coming within s 236(2)(b) and (c) of the Act include persons ‘suspected’ of having property of the company in their possession, persons ‘supposed’ to be indebted to the company and persons whom the court ‘thinks capable’ of giving information concerning its affairs. Those are persons who may be summoned to appear before the court under sub-s (2); and who may be required to produce documents under sub-s (3). But, although the persons against whom an order for production may be made may include those whom the court suspects of having the company’s property, or thinks capable of giving information concerning its affairs (as the case may be), the documents which they can be ordered to produce must satisfy the factual test specified in sub-s (3) – that is to say they must be documents relating to the company. It is not enough that the documents may relate to the company or may be thought to relate to the company; unless the documents do relate to the company there is no power to order their production.” (Emphasis supplied)

15.  In Mid East Trading, the Court of Appeal took a different view from the finding of fact of the court below and held that the evidence adduced did not establish that the documents in the possession of third parties relating to two other companies must necessarily relate to the company that was in liquidation, so that part of the order of the judge (which provided that for the purpose of production under section 236, the documents relating to the business, dealings, affairs and property of the other two companies were documents relating to the subject company) could not stand for want of jurisdiction.  The Court of Appeal substituted for it a different paragraph, to make clear that documents relating to the other two companies would only be treated as documents concerning the business, dealings and affairs of the subject company for the purpose of the production order, where such documents also related to or evidenced transactions effected on behalf of investors (the subject company operated as a financial adviser and investment manager for investors) or any other persons claiming to be creditors of the subject company identified by the liquidators (at 254c to f).

16.  The question here is whether on the evidence adduced by the liquidators, the documents sought in Schedule 1 in respect of the Designated Companies satisfy the factual test in section 221(3) – that they do relate to the Companies.  I should mention that I am satisfied that documents and information are reasonably required by the liquidators in carrying out their functions.  The matters for which the information and documents sought would, in the views of the liquidators, materially assist them in ascertaining are comprehensively set out in paragraph 35 of the submissions of Miss Chan.  I attach significant weight to the views of the liquidators, as they would have detailed knowledge of the problems which exist in relation to the affairs of the Companies and the information required.  I also bear in mind that an application under section 221 is of a summary nature, the court cannot be expected to indulge in fine judgments as to the precise width of the order which is to be made, and the liquidators are not obliged to make out their reasonable requirement in as much detail as they would be required to do on an application for discovery.

17.  Miss Chan has also cited to me the case of Re Bank of Credit and Commerce SA, Morris v. Bank of America National Trust & Savings Association [1997] BCC 561, which showed that the court may make an order for production that is extremely broad in scope in an appropriate case, and the following dicta of Vinelott J in Re Cloverbay Ltd. (1989) 5 BCC 732 at 737E:

“In the ordinary course, disclosure of bank accounts of a company in this position and of correspondence, bank mandates and the like is essential to the discharge of the task of a liquidator or administrator. It cannot be restricted to specific categories without giving rise to a risk that administrators or liquidators will fail to learn of a transaction previously unsuspected which would have founded a claim, whether against in this case BCCI or someone else.”

18.  Miss Chan submitted that in an application under section 221, the liquidators are not required to prove, with “forensic detail”, how and to what extent the Designated Companies were involved in the affairs of the Companies; this is particularly so when the liquidators have effectively been kept in the dark as to what documents are held by HSBC and in respect of which companies (cf. Re BCCI, Morris v Bank of America, supra. at 575E to H).  In the 8^th affidavit of Mr. Borrelli, he has explained why the liquidators will not be able to give “forensic detail” in relation to the Designated Companies, due to the substantial difficulties encountered by the liquidators in identifying those companies which formed part of the Akai group and the transactions between the Akai group and counter-parties.  Their investigations are ongoing.

19.  In the 20^th affidavit of Mr. Borrelli, he gave an explanation of the background to and the purpose of the list of the Designated Companies in Schedule 2.  He divided these companies into four categories and identified in which of the categories each of the companies would fall.

20.  Category 1 is made up of subsidiaries of the Companies at relevant times prior to the winding up of the Companies and which remain subsidiaries of which the liquidators or their nominees are now either directors or liquidators.  Category 2 comprises subsidiaries of the Companies at relevant times prior to the winding up of the Companies but which subsequently ceased to be subsidiaries and/or are not under the control of the liquidators. There are a total of 126 companies in these two categories.

21.  Category 3 is the largest category, made up of companies which entered into transactions with the Akai group which are the subject of investigations by the liquidators and which appear to have been controlled by and/or related to James Ting and officers under his direction, incorporated in overseas jurisdictions for specific purposes and were recipients of funds from the Akai group, including the “BT Deposit” account or in some cases engaged in specific transactions with the Akai group which appeared to have led to losses having been incurred by the Companies.  There are 270 companies in this category.

22.  Category 4 is made up of subsidiaries of the Grande group, which, as defined in Schedule 1 to the draft order, includes companies within the Toyo group.  There are 89 companies in this category.

23.  In respect of the Designated Companies in Schedule 2, the liquidators seek the production of documents listed in paragraphs 1 and 2 of Schedule 1, which relate to their bank accounts and loan facilities, and not in respect of any of the documents listed in the other paragraphs of Schedule 1, with the exception of the companies in category 4, which I shall deal with. 

24.  I am satisfied that in respect of categories 1 and 2, the bank account records and loan records of these companies are documents relating to the affairs of the Companies and these records are reasonably required by the liquidators to properly understand the affairs of the Companies and the Akai group.

25.  For category 3, Mr. Borrelli in his 8^th affidavit has set out the substantial unusual transactions involving the companies in this category with the Companies or with members of the Akai group.  I do not think it necessary for the liquidators to identify, in respect of each of the 270 companies in this category, which particular transaction or transactions were entered into by each company and with which member of the Akai group.  I should take a pragmatic and broad-brush approach in this application of a summary nature.  I am satisfied that the bank account records and loan records of the companies in this category are also documents relating to the affairs of the Companies and that these records are reasonably required by the liquidators to properly understand the affairs of the Companies and the Akai group, in particular, the “BT Deposit” general ledger account and the ultimate destination of the funds paid out of the Akai group under the direction of James Ting.

26.  There was an apparently close relationship between the companies in category 4 with the Akai group and the liquidators have identified several highly suspicious transactions between the Akai group and the Grande group.  The liquidators accepted that not all of the banking records of the companies in this category would necessarily relate to the affairs of the Companies.  They proposed to carve out from paragraphs 1 and 2 of Schedule 1 the companies within the Grande group so that the order for production in respect of the companies in category 4 is subject to the qualification that production is made only where the documents relate to the affairs, financial condition, management, control, ownership, assets, liabilities and prospects of the Akai group.  This qualification also applies to the documents in paragraph 3 of Schedule 1, which relates to group credit assessments in connection with HSBC’s consideration of its exposure to the Akai group and the Grande group during the relevant period.  The qualification does not extend to Tremendous Springs Limited (“TSL”), which was intimately involved in the affairs of the Companies as explained in Mr. Borrelli’s 20^th affidavit, such that all banking documents held by HSBC in respect of TSL ought to relate to the Companies.  With the qualification as proposed, I am satisfied that the records sought to be produced would relate to the affairs of the Companies and that they are reasonably required by the liquidators to properly understand the affairs of the Companies and the Akai group.

27.  For the above reasons, I make an order for production of documents and for oral examination of the 2^nd to 7^th respondents.  I approve the revised draft order submitted by the liquidators on 12 January 2006, save that all references to “Further Account Related Documents” are to be deleted.